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Indian central bank signals scope for more rate cuts to get economy on track

By Swati Bhat

MUMBAI (Reuters) - India's central bank monetary policy committee favors cutting interest rates and continuing with an accommodative stance until the economy is firmly on a recovery path, its minutes showed.

A significant moderation in domestic demand at a time when inflation is seen staying well within mandated targets provides adequate monetary policy space to support economic growth, the Reserve Bank of India minutes released on Friday said.

The RBI this month cut rates by 25 basis points as expected, taking cumulative cuts to 135 bps so far in 2019.

India's retail inflation rose close to the central bank's medium-term target of 4% in September for the first time in 14 months but is expected to remain well within the mandated 2-6% band until first quarter of 2020/21 as per RBI projections.

The economy grew at its weakest pace since 2013 in the June quarter, expanding at just 5%, as consumer demand and government spending slowed amid the global trade frictions.

"This pronounced cyclical downswing suggests that the state of the economy will likely get worse before it gets better," RBI executive director and committee member Michael Patra said.

India has in recent weeks announced measures including a cut in corporate tax rates, steps to revive the crisis-hit autos sector, small businesses, and its troubled shadow banks to calm investor nerves and lift consumer sentiment.

The fiscal measures have raised concerns of missing a fiscal deficit target of 3.3% for 2019/20 fiscal year but India's finance minister has assured markets they will meet the target.

RBI Governor Shaktikanta Das, however, said there is a need to be watchful of the fiscal situation.

The central bank at its policy review also lowered its growth forecast for the current fiscal year to 6.1% from 6.9% and most members suggested the recovery in growth may take longer than previous expected.

"Monetary policy ... cannot be a permanent form of stimulus ... further monetary policy action will depend on the evolving growth-inflation dynamics," member Chetan Ghate said.

(Reporting by Swati Bhat; Editing by Alexander Smith)

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